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On the Friedman Rule in Search Models with Divisible Money

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Author Info
Aleksander Berentsen (University of Basel)
Guillaume Rocheteau (Australian National University)

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Abstract

This paper studies the validity of the Friedman rule in a search model with divisible money and divisible goods in which the terms of trades are determined endogenously. We show that ex post bargaining generates a holdup problem similar to the one emphasized in the labor-market literature. Buyers cannot obtain the full return that an additional unit of money provides to the match, which makes the purchasing power of money inefficiently low in equilibrium. Consequently, even though the Friedman rule maximizes the purchasing power of money, it fails to generate the first-best allocation of resources unless buyers have all the bargaining power.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Macroeconomics.

Volume (Year): 3 (2003)
Issue (Month): 1 ()
Pages: 1121-1121
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Handle: RePEc:bep:maccon:v:3:y:2003:i:1:p:1121-1121

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Related research
Keywords: Money Search Friedman rule

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Find related papers by JEL classification:
E00 - Macroeconomics and Monetary Economics - - General - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guillaume Rocheteau & Randall Wright, 2003. "Inflation and Welfare in Models with Trading Frictions," PIER Working Paper Archive 03-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  2. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland. [Downloadable!]
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